Your IT team spent six months building a system for a sister company and billed nothing for it. You recovered the input VAT on the licences, hardware and contractor time behind it. So what number goes in your VAT return? It is a deemed supply, and the businesses we see have valued one with a reasonable estimate and hoped the FTA agreed. That guessing period is over.
TL;DR: FTA Directive No. 5 of 2026 sets one method for valuing deemed supplies of services. Take the open market value, divide by one plus your prior-year net profit margin, then apply the proportion of costs that carried input VAT. Check Article 36 first, because related-party supplies can override the whole calculation.
What Changed in July 2026?
The Federal Tax Authority issued Directive on Tax Transactions No. 5 of 2026 on 20 July and published it on 22 July. It prescribes how to determine the value of a deemed supply of services under Article 37 of the UAE VAT Law (Federal Tax Authority, 2026). It is one of five binding VAT directives issued this year, and it carries no separate commencement date, so it applies from publication.
These directives bind the FTA as well as the taxpayer, and they stay in force until they are withdrawn or replaced by law (KPMG, 2026). That matters: a published method you can point to is worth more at audit than a defensible-looking spreadsheet of your own design. The sibling directives cover leaving a VAT group and converting digital currency values into dirhams, both written up separately.
What Counts as a Deemed Supply of Services?
A deemed supply arises when you provide a service without charging for it, having already recovered input VAT on the costs behind it. Article 11 of Federal Decree-Law No. 8 of 2017 treats that as a supply even though no invoice was raised and no money moved.
In practice it catches fewer situations than people fear, but the ones it catches are common: back-office support given free to a group company, staff using company resources privately, professional time donated to a related entity, or internal services provided to an exempt division after the input tax was claimed.
What we see most often is the second, and it is rarely deliberate. A finance team recovers VAT on the full software licence estate, then part of it quietly serves private use for a year. The recovery was correct at the time, but the output side was never picked up.
The Two Exceptions in Article 12
Before you calculate anything, check whether Article 12 lets you stop. Two exceptions do the work, and only one of them covers services.
The AED 500 rule applies to goods only. Where the value of goods supplied to each recipient across a 12-month period does not exceed AED 500 as samples or commercial gifts, no deemed supply arises (Federal Tax Authority, 2017). Free services do not get this exit, so do not reach for it when what you gave away was time rather than stock.
The AED 2,000 rule does cover services. If the total output tax on all your deemed supplies across a 12-month period comes to less than AED 2,000, none of them are treated as deemed supplies. That test sits at taxable-person level, so you aggregate across every recipient rather than testing each one, and it rolls, so the answer can change mid-year.
How Do You Value a Deemed Supply Now?
The directive works backwards from price to cost, rather than building up from the ledger.
Start with the open market value of the service. If your own pricing does not give you one, use what a comparable service sells for.
Then strip out profit. Divide the open market value by one plus your net profit margin, taken from the previous financial year's statements, or a sector average where your own figure is not available. The formula is estimated total cost = open market value divided by (1 + net profit margin).
Finally, remove the costs that never carried VAT. Work out what proportion of your prior-year costs had input tax incurred on them, then apply that percentage to the figure above. What is left is your taxable value.
A Worked Example
Say the open market value of the service you provided free is AED 300,000, your prior-year net profit margin was 20%, and 70% of your costs carried input VAT.
Stripping profit gives AED 300,000 divided by 1.20, which is AED 250,000. Applying the cost ratio gives AED 250,000 multiplied by 70%, which is AED 175,000. VAT at 5% on AED 175,000 is AED 8,750.
The logic is that VAT claws back only the input tax the business incurred, so profit and non-taxed costs come out before the rate is applied. Note that the margin is stripped by division, not subtraction. Subtracting 20% gives AED 240,000 rather than AED 250,000, which drops the taxable value to AED 168,000 and understates the VAT by AED 350.
Check Article 36 Before You Use This Method
This is where we expect most errors, and it can take the calculation above off the table. Article 36 covers related parties and applies as an exception to Article 37 (Federal Tax Authority, 2025).
It bites where the recipient is a related party, the value is below market value, the supply is taxable, and the recipient cannot recover the full input tax. Meet all of those and market value applies instead of the figure Directive No. 5 produces. A recipient inside your own VAT group is simpler: that supply is disregarded, so neither article engages.
The recovery condition does the real work. Give a free service to a related company that recovers input tax in full and Article 36 does not engage, so the directive governs. Give it to a partly exempt arm and market value applies, usually the higher figure. One question clients always ask is whether an intercompany recharge fixes this. Charging takes it out of deemed supply territory, but Article 36 can still substitute market value if you recharge below it and the recipient cannot fully recover.
What Should You Do Before Your Next VAT Return?
Start with a list. Go through the last four quarters and identify every service you supplied without charging for it, then keep the ones where input VAT was recovered. Sort what is left by whether the recipient is a related party, because that decides which article you are in.
Pull two numbers from your prior-year statements while you are there: net profit margin, and the proportion of costs that carried input tax. Each deemed supply goes into your return as a standard-rated supply in the period it arises. The standard tax period is three months, monthly at AED 150 million or more in turnover, with the return due 28 days after the period ends (Federal Tax Authority, 2026).
Then check errors already filed. An incorrect return carries AED 500 for a first violation and AED 2,000 for a repeat under Cabinet Decision No. 129 of 2025, effective 14 April 2026, and voluntary disclosure carries 1% per month of the underpaid amount (PwC, 2025).
Frequently Asked Questions
When did FTA Directive No. 5 of 2026 take effect?
The FTA issued it on 20 July 2026 and published it on 22 July 2026. It specifies no separate commencement date, so it applies from publication rather than after a lead-in period. Directive No. 2 of 2026 on VAT group exits, by contrast, carried a stated effective date of 1 August 2026.
Does this directive apply to deemed supplies of goods?
Article 37 applies the same total-cost test to goods and services alike. Directive No. 5 prescribes a method for working that cost out for services only. Goods continue under the general Article 37 test without the profit-stripping mechanic.
What if my business has no open market value for the service?
The directive starts from market value and allows a comparable service where your own pricing gives you nothing. Where nothing comparable exists, our own practice is to build the cost up internally and document the reasoning at the time. Treat that as a defensible fallback rather than a route the directive expressly sanctions.
Which net profit margin should I use if last year was a loss?
The directive points to the previous financial year's statements first and allows a sector average where your own figure is not usable. A loss-making year is a reasonable case for that, but record why you departed from your own accounts.
Do I need to be VAT registered for any of this to matter?
Yes. Deemed supply rules apply to registered businesses. Registration is mandatory once taxable supplies and imports exceed AED 375,000 in a 12-month period, and voluntary registration opens at AED 187,500 (Federal Tax Authority, 2026). Our guide to UAE VAT compliance covers registration.
If your business provides services free of charge to group companies, staff or an exempt division, the numbers you file for those supplies just changed. Get in touch and we will work through your deemed supply position, check which article each one falls under, and tell you whether anything already filed needs a voluntary disclosure.